Central Banks: Guardians of recovery AND More...

1. Interest rates are rising but economic conditions should remain strong. Thus, default risks may stay low, and short-duration high-yield debt, including bank loans, are vehicles that can capture higher yield while potentially reducing interest-rate risk. Thus I would prefer adding short duration high yield financials.

2. After lagging in 2021, emerging-market debt has a lot of room for improvement this year. Central banks in emerging markets have been well ahead of developed markets in raising rates to stem inflation risks. If inflation stabilizes as we expect in 2022, then both local emerging-market debt and currencies stand to appreciate as global investors become attracted to the yield, carry and potential returns from this asset class.

3. Food and energy form a major portion of the inflation basket in Europe, and apparently the prices for these 2 items are exogenous and hence it will take a severe recession for the ECB to bring down the inflation numbers under control. But what are the indicators that point towards a central bank hiking too much into recession?

4. Can fiscal measures help solve the supply chain disruption issue? Meaning can the treasury work some tax and subsidy policy to incentivize the companies to hold optimal inventory. This way we can control the supply side using fiscal measures and the demand side using the monetary tools.

5. No central bank wants to create a recession, but from the recent dot plot, we see that the expectation is for the Fed to hike rates to near 4%, which is way beyond 2.5% neutral rate, a rate which neither stimulates nor reduces economic activity. But given the ongoing energy crisis, upcoming sluggish growth quarters, and reducing corporate profits, I think we would see a recession but maybe a shallow one.

6. The central bank balance sheets are now shrinking, and this gives me further more reason to believe that the benchmark treasury yield has not peaked.

7. The Japanese Yen has depreciated by more than 25% in the last 3 months, the largest fall ever for the JPY. With advanced economies raising interest rates, investors are attracted by the higher yields in DMs. This led to massive FII sell off in Japan. This in turn is now leading to imported inflation. PPI inflation was still 9.1% YoY in May, Japan core CPI rose by 2.1% YoY in April.

8. Interesting Charts: